by Neil George
Remember when all folks had to do to pay for their retirement was to simply go along with the working crowd and their pension and social security would take care of them?
Pensions were the norm. If you showed up on time, kept your head down and did a reasonable job – after so many years you’d get the gold watch and regular checks would start showing up every so many weeks.
Those pensions protected against inflation, stock market gyrations and pretty much everything else. And to make them even better, many pension payouts were based on a worker’s highest-salaried years.
Sweet.
And on top of the pensions, there was social security – whereby Uncle Sam would give back a portion of your taxes paid over all of those years of working.
Any saving and investing that folks did was simply gravy for their retirements.
This plan worked well. From the private sector world of corporations, to the public sector of government, workers were pretty much set when it came to retirement planning.
Stock market calamities? Not really an issue, as pensions were set and supposedly watched over by State and Federal regulators. And remember – traditional pensions provided defined benefits, not defined contributions. This meant that payouts were locked in – eliminating the worry of making the correct retirement investments.
Times changed, of course – and yet too many folks still aren’t willing to recognize that retirement planning isn’t an option, but a requirement – that is, if you don’t want to have to keep working until you keel over.
Retirement Dreams Became Nightmares
In the private sector there’ve been some serious wake-up calls to workers’ retirement dreams. To begin with, some companies that were supposed to be funding retirement pension plans weren’t really going along with the rules.
Even worse: According to the Financial Accounting Standards Board (FASB), pensions don’t even need to be based on real world market conditions.
FASB allows companies to use estimates rather than actual investment performance when accounting for the amount of assets needed to be held in their funds. The idea behind this is that in any quarter, the markets might create big swings – either positive or negative – that would cause either over- or under-funded conditions that would cause issues in the short haul for companies.
So, FASB allows companies to use assumptions for performance. The assumptions are based on the view that the markets generate long-term average returns of 8 percent. Yep, 8 percent is assumed to be a good number – despite all evidence to the contrary.
And while some at FASB have brought up the fact that the S&P hasn’t generated anything close to that number for more than a decade – it’s all been kept quiet so as not to upset corporate earnings. Congress has even stepped in to stop FASB from changing the assumed rates, thanks to the power of the lobbyist class in Washington.
It gets worse. While FASB lets companies inflate pension asset values – it also allows liabilities to be minimized. Just two years ago, the discount rate for future payments was changed from the Treasury market rates to corporate bond average rates. This means that the lump-sum current value estimates to fund payouts are now significantly reduced well below long-term traditional amounts.
The impact of both of these components of FASB’s pension accounting rules is to overstate assets and understate liabilities.
No wonder then, as many corporations went under during the past several years, that another government entity – the Pension Benefit Guaranty Corporation (PBGC) – has faced major payout issues from under-funded pensions.
And for those who were rudely awakened to a defaulted pension – the waking nightmare is a dramatic drop off in pension payments. The PBGC pays out only a small portion of the originally promised amounts from dead pension plans.
Public Sector Retirement Plans at Risk
Pension plan troubles get even stickier when it comes to the public sector.
Right now there are countless cities and counties and states around the union with pension plans that – even by the loosy-goosy FASB standards – aren’t even close to being funded.
In some states, such as California, just paying current pensions takes up the majority of the budget.
And in several other states, underfunded liabilities amount to as much as a trillion dollars.
This is all well before anybody starts to look at social security’s pay-as-you-go gap. It’s no longer just looming – recently it’s become a reality in select quarters of the US Federal Budget.
The solution isn’t pretty. In the private sector – companies have been switching away from defined benefit to defined contribution pensions. This means that companies offer workers the ability to set aside cash each payday into qualified retirement accounts such as 401ks – contributions which the companies may or may not choose to match.
This same practice is being considered for the government sector – but not without a whole lot of screaming. And one thing politicos hate is screaming – especially around election season.
But in reality, this is the only way to go. And for anyone who’s working towards retirement – another reason not to put your trust in any company or the government when it comes to your future.
4 Steps to a Prosperous, Secure Retirement
For many, it’s not pleasant waking up to the fact that funding retirement is their own responsibility. But rather than screaming about it – just accept that you’re going to have to work harder to make your retirement work.
Even if you do have one of those old-time pensions – as noted above – don’t take your payments for granted.
Take a look at your retirement accounts. Look at your 401k, or equivalent plans such as 403bs, SEPs and any IRA accounts. Add up what you have and then look at how much cash is being generated each month by the investments.
Then do the even scarier work. Take out your checkbook and do a rundown on the checks you cut every month. Add them up and then match it up with what your retirement accounts are generating.
For many – the numbers won’t match. If the monthly returns from your retirement accounts are more than you’re spending, congratulations. More likely – the checkbook is spending a lot more than the retirement account is generating.
Don’t panic. You’re not alone.
The way to make income and expenses match is to do what the government doesn’t like to talk about. Spend less right now and save and invest more. Perhaps not good for stimulating an economy that’s based on “shop ‘til you drop” – but a whole lot better for stimulating your own retirement.
Then go to work on what you’re actually investing in your retirement accounts. This is where my Pay Me Strategy comes in. For years and years I’ve been writing and providing my recommendations of stocks, funds and other investments that focus on the core need from any retirement investment – that they pay and pay well.
From dividends to coupon payments – along with some gradual growth to offset inflation – the key for making your investments actually pay for your retirement is to make sure that you aren’t just holding the usual stocks of the S&P and hoping that they’ll appreciate. Instead, make sure that as you go down the list of your investments that they are piling up cash – not just promises.
Take a look at a typical example from my Pay Me Strategy – an oil drilling company that takes the same approach to business that we all should take for our retirements – looking at both its assets and its liabilities. Even better, it’s so focused on both – that often the liabilities tend to get more focus.
The result is solid and steady performances with fewer mistakes – something that’s now getting noticed, as its peers have gotten more than their wrists slapped for ignoring threats.
The company is Seadrill. Out of Norway – the company trades on the NYSE under the symbol SDRL.
Now if you look at the chart, you’ll see big gains of 30 plus percent over the past couple of months or so. That’s fine – but not why I’ve been recommending SDRL for a while now.
Instead, look at the income statement. That’s where you’ll see the structure of a company that knows how to get paid – and in turn pay out a great dividend to shareholders. Right now, even with the big share price gains, it’s yielding 8 percent.
But even more important – look at the balance sheet. Yep, you’ll see a lot of cash and not a lot of debt. Remember – it’s all about liability management.
And there are plenty more companies and other investments just like this one that you need to own. All it takes is the wake up call that no one is going to give you a retirement – you need to build it yourself.
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